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California pension fund's $100 billion climate bet, one year in

A year ago, the California Public Employees’ Retirement System unveiled a strategy to take on “the next big new investment opportunity.”

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Image credit: Lisa Martine Jenkins (Photo credit: Jenson / Shutterstock)

Image credit: Lisa Martine Jenkins (Photo credit: Jenson / Shutterstock)

Earlier this week, the investment board of the California Public Employees’ Retirement System gathered in a neon-lit room to discuss its sustainable investment strategy, which had just turned one year old.

With over $500 billion in assets, the public pension fund is the largest in the United States, and last November it launched an ambitious climate strategy, which aims to invest $100 billion in climate solutions by 2030. The program is an example of how public pension funds can wield their market heft to further the energy transition — especially as the election of Donald Trump to the White House is anticipated to complicate things.

While fossil fuel divestments have become more common among pension plans, CalPERS’ approach to “climate solutions” investments is something else. The organization defines them as anything that results in mitigation, adaptation, or decarbonization (especially of hard-to-abate sectors). That includes traditional renewable energy assets like solar and wind, which have long been favorites of public pension funds because of their reliable returns. But it also includes more nascent technologies:  carbon capture, alternative materials in cement production and energy efficiency, sustainable fuels, and even advanced nuclear and hydrogen-powered aircraft.

As of July 2024, CalPERS committed more than $53 billion to climate solutions investments, which includes a $5 billion to a public equity climate transition index, according to board documents. The total does not include $3.2 billion in undisclosed closed deals and private assets commitments made over the past year, which CalPERS officials are currently reviewing.

Paula Langton, head of sustainability at advisory firm Campbell Lutyens, where she advises private funds on their strategy and fundraising, described CalPERS’ climate solutions program as unusual in how varied and wide its investments are. “They took a multi-faceted approach to climate in terms of co-investments, primaries, investments, and asset classes as well,” she told Latitude Media

It’s an approach that’s markedly different from just committing  a sizable amount of money to a major energy transition fund, such as TPG Rise Climate or the Brookfield Global Transition Fund, to hit sustainable targets

According to Peter Cashion, CalPERS’s managing investment director for sustainable investments, the organization’s approach has “embedded flexibility” and could result in more “diversification and amplitude of opportunities.” 

Some of those investments are in major, global companies. Just last month, for instance,  CalPERS co-invested in Octopus Energy alongside Australian pension fund Aware Super; the British energy retail and services giant raised an additional $800 million last December from its existing shareholders to expand globally, including into the U.S.

An important part of CalPERS’ strategy is that it dedicates a substantial amount of money solely to climate solutions. Funds are committed according to investment plans made in collaboration with the asset classes CalPERS traditionally invests in, such as real estate, infrastructure, public equity, and private equity. 

“We will look for those investments that we think will generate the highest return, and we see a unique opportunity within climate solutions,” Cashion said at the board meeting. “It's an open playing field where we identify the best opportunities.” 

Langton said having a dedicated pool of money can sometimes be better because it doesn’t put climate investments in competition with other investments. 

“The challenge when [institutional investors] invest in venture capital climate funds through their main venture capital bucket is the competition,” she said. “A lot of the U.S. venture funds have performed so well, while some of the climate venture funds are really early and don't have returns yet. [When] a pension fund invests in a climate fund out of the climate pool, they're willing to take a bit more flexibility on the risk and return.” That flexibility allows CalPERS to make investments that are not uniquely tied to the risk-return profile of an asset class. 

The political hurdle

The election, however, has thrown a wrench. 

Going forward, Cashion notes that the Trump administration's anticipated embrace of oil and gas will change the type of risk the fund takes into consideration when making investment decisions. The risk that asset operators face because of a shift towards a lower-carbon economy, which might require policy and regulatory changes, is now reduced or postponed — though the physical risks assets might face because of climate change-related events “may actually increase.” 

“Although this may be unfortunate, it does create investment opportunities in the area of resilience, meaning the response to climate change,” he said. “So heat resistant crops, power generators, air conditioning, fire suppression… will become more interesting investment opportunities.” That’s a conclusion that other investors have come to recently as well, given the surge of interest in adaptation.

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We will look for those investments that we think will generate the highest return, and we see a unique opportunity within climate solutions. It's an open playing field where we identify the best opportunities.
Peter Cashion, CalPERS’s managing investment director for sustainable investments

Generally, though, Cashion believes CalPERS’ existing strategy to be resilient, even if the change in administration will possibly require some shifts in strategy. 

“We underwrite our investments without factoring in any green subsidy, as do our managers,” he said, adding that he doesn’t think the Trump administration will be incentivized to dismantle the Inflation Reduction Act in any meaningful way, given that it’s benefiting conservative states. “If we determine that climate investment opportunities are lower in the U.S., we will also be open to looking more into non-U.S. markets.”

“Interestingly,” he continued, “these energy policies are, in fact, a good argument for non-divestment from oil and gas, because those companies can potentially outperform despite these political and regulatory changes.” (Despite its innovation on climate investments, CalPERS has been heavily criticized for opposing mandatory fossil fuel divestments; the organization argues that divestment does not mitigate greenhouse gas emissions and could harm investment strategies.)

But this is just the latest political hurdle for CalPERS — and any other pension plans that may want to follow its lead. In the last few years, the topic of public pension funds making climate investments has become deeply politicized. 

In 2022, for example, Florida Governor Ron DeSantis barred the State Board of Administration of Florida, which is responsible for managing the state’s pension plan investments, from taking into consideration “the ideological agenda of the environmental, social, and corporate governance movement” when making investments decisions. 

While that doesn’t prevent the pension plan from making climate-related commitments — a few weeks after the decision was approved by the Florida Senate in 2023, the board went right ahead and gave $200 million to Blackstone Green Private Credit Fund III, which lends to renewable energy and energy transition — it requires that the decision is justified “solely” by financial gain.

Appetite for risk

While public investment in clean energy is becoming more popular, there is more to do. A recent report tracking pension funds’ net zero progress found that investments from the public sector are flowing both to clean energy and fossil fuels. In Europe, for instance, 43% of pension funds funding is going towards new fossil fuels capacity and 57% towards new clean energy. 

“You do have an increasing pattern of financing for clean energy, but you have a comparable level of financing going to fossil fuel,” said Valerio Micale, a policy advisor at the Climate Policy Initiative and one the report’s authors,. “There is not a strong decoupling.” 

While pension funds are rarely directly involved in new projects without a bank or an asset manager as an intermediary, Micale said, they have the power to engage and influence asset managers' behaviors to increase clean energy investments. CalPERS, for instance, is demonstrating a higher tolerance for risk from those investments.  

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Paula Langton thinks more pension funds should adopt a similar attitude.

“You've got to take some risk and invest in first-time funds, maybe even emerging markets, because it's a global problem to fix, and therefore it needs somewhat of a different risk perspective,” she said. “If your pension plan is just investing in traditional asset classes, without any climate adaptation or mitigation exposure, arguably you face an entirely different or likely worse risk.”  

CalPERS’ sustainable investment strategy is still young, and performance measurements are premature, but a lot is riding on them. As Lisa Middleton, one of CalPERS’ board members, pointed out, they’re likely to have a meaningful influence on pension plans’ behaviors toward climate investments.

“We’ve stated to the public that we believe this is the next big new investment opportunity. It’s up to us to be able to prove that we are correct.” 

The story has been updated to reflect that CalPERS' undisclosed investments currently under review are $3.2 billion, not $3.6 billion, as previously stated.

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